Qantas Catches Rivals on the Hop With China JV

By Ross Kelly

A little bit could go a long way for Qantas Airways, which is continuing to adopt what it calls a “capital light” approach to expanding in Asia.

The Flying Kangaroo plans to tip no more than US$99 million into its new joint venture with China Eastern Airlines, a sum analysts agree won’t burn a hole in its pouch.

Reuters

An airport worker stands in front of a Jetstar passenger plane

“While the investment in Jetstar Hong Kong is relatively immaterial to Qantas Group, representing about 1% of group capital over three years, it provides the company with a clear avenue to growth in the Greater China region,” Goldman Sachs said.

Qantas and China’s second-biggest airline by passengers intend to fly three Airbus A320s from mid-2013, rising to 18 by 2015.

Investors sent Qantas shares up 2% Monday in a wider Australian market down 0.1%, offsetting the disappointment of its failure a few weeks ago to create a premium subsidiary carrier with Malaysian Airlines.

To be sure, Jetstar’s other Asian joint ventures have taken years to turn a profit.

The new venture will have to fight for slot space at crowded airports and overcome Hong Kong’s high airport fees and labor rates. These were among cost pressures cited by Cathay Pacific Airways as reasons for not establishing a budget offshoot of its own.

Hong Kong’s history of low-cost carriers isn’t a happy one.

Oasis Hong Kong Airlines closed in 2008 less than 18 months after it started operations. Although it experienced demand for its offering, it appeared under-capitalized and wasn’t able to expand fast enough to get a “critical mass” of aircraft and destinations.

The difference for Qantas, though, is that with China Eastern on board it already has an experienced partner with an established network in the region. While Qantas’s international business is losing money, a robust performance at home driven in part by Australia’s mining boom is keeping the company profitable and its balance sheet in check.

The blistering pace of China’s economic development and sheer size of its population will no doubt attract others to its aviation market.

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Deal Journal Australia is an up-to-the-minute take on the deals and deal makers that shape the Australian landscape, including mergers and acquisitions, capital raisings, private equity and debt markets. In short, wherever money changes hands. Deal Journal Australia is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s Gillian Tan is the lead writer, with contributions from other Journal and Dow Jones reporters and editors. Send news items, comments and questions to gillian.tan@wsj.com.

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